Overview. Landmark Bancorp, Inc. is a bank holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank. Landmark Bancorp is listed on the NASDAQ Global Market under the symbol "LARK". Landmark National Bank is dedicated to providing quality financial and banking services to its local communities. Landmark National Bank originates commercial, commercial real estate, one-to-four family residential mortgage loans, consumer loans, multi-family residential mortgage loans and home equity loans.

Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. While net interest income was stable for the second quarter of 2009, results were affected by certain non-interest related items. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees and gains from the sale of newly originated loans and gains or losses on investments. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expenses and provision for loan losses.

We are significantly impacted by prevailing national and local economic conditions, including federal monetary and fiscal policies and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing personal investments, the level of personal income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and commercial loans as well as the interest rate pricing competition from other lending institutions.

Critical Accounting Policies. Critical accounting policies are those which are both most important to the portrayal of our financial condition and results of operations, and require our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the allowance for loan losses, the valuation of investment securities, income taxes and business acquisitions, all of which involve significant judgment by our management.

Information about our critical accounting policies is included under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008. The only change in our critical accounting policies since December 31, 2008 is a result of the adoption of FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other Than Temporary Impairments." Based on the guidance in the FSP, now if we deem a decline in the fair value of a debt security to be other than temporary, we lower the cost basis, through a charge to earnings, by the amount of credit losses inherent in the investment versus writing the security down to market value.

Summary of Results. During the second quarter of 2009, our net earnings declined by $564,000 to $1.0 million as compared to net earnings of $1.6 million in the same period of 2008. During 2009 we identified a $1.0 million par investment in a pooled trust preferred security as other than temporarily impaired. The net credit-related impairment charge related to this security was approximately $249,000 for the second quarter of 2009. Also contributing to the decrease in earnings was an increase in our provision for loan losses of $500,000 for the second quarter of 2009 as compared to 2008 based on our analysis of our loan portfolio, which included the increased level of non-accrual loans as well as the effects of the current economic environment on our loan portfolio. Also during the second quarter of 2009 our FDIC insurance premiums increased by $435,000 as the result of a $277,000 special assessment, higher assessment rates and the depletion of our FDIC credits. Partially offsetting the increased expenses was an increase in non-interest income, which was primarily attributable to an $805,000 increase in gains on sale of loans, driven by higher origination volumes of residential real estate loans that were sold in the secondary market. Results for the second quarter of 2008 included $497,000 of gains on sales of investment securities.

During the first six months of 2009, our net earnings declined by $622,000 to $2.0 million as compared to net earnings of $2.6 million in the same period of 2008. During the first six months of 2009 we identified a $1.0 million par investment in a pooled trust preferred security as other than temporarily impaired. The net credit-related impairment related charge to this security was approximately $576,000 for the six months ended June 30, 2009. Our provision for loan losses increased by $200,000 for the first six months of 2009 as compared to 2008 based on our analysis of our loan portfolio, which included the increased level of non-accrual loans as well as the effects of the current economic environment on our loan portfolio. Also during the first six months of 2009 our FDIC insurance premiums increased by $454,000 as the result of a $277,000 special assessment, higher assessment rates and the depletion of our FDIC credits. Partially offsetting the increased expenses was an increase in non-interest income, which was primarily attributable to a $1.2 million increase in gains on sale of loans driven by higher origination volumes of residential real estate loans that were sold in the secondary market. Results for the first six months of 2008 included a $246,000 gain from the prepayment of a FHLB advance, which represented the remaining unamortized fair value adjustment recorded in purchase accounting and $497,000 of gains on sales of investment securities.

Our net interest margin increased from 3.47% for the second quarter of 2008 to 3.58% for the second quarter of 2009. For the six months ended June 30, 2008 and 2009, our net interest margin increased from 3.48% to 3.52%, respectively. For each period, we were able to reduce our cost of deposits enough to offset the lower yields earned on loans and investment securities in markets that experienced a dramatic decline in benchmark interest rates that began in late 2007 and continued throughout 2008 and 2009. The lower cost of funding allowed us to maintain our net interest margin in markets that had considerable competitive pricing pressures. While the competitive pricing pressures have eased recently, they could return during 2009 which may make maintaining or increasing our net interest margin difficult.

The following table summarizes earnings and key performance measures for the periods presented.

         (Dollars in thousands)               Three months ended June 30,           Six months ended June 30,
                                               2009                2008              2009               2008
Net earnings:
Net earnings                               $       1,012       $       1,576     $      2,021       $      2,643
Basic earnings per share                   $        0.43       $        0.66     $       0.85       $       1.09
Diluted earnings per share                 $        0.43       $        0.66     $       0.85       $       1.08
Earnings ratios:
Return on average assets (1)                        0.67 %              1.03 %           0.67 %             0.87 %
Return on average equity (1)                        7.81 %             12.51 %           7.81 %            10.38 %
Dividend payout ratio                              44.19 %             27.54 %          44.71 %            33.33 %
Net interest margin (1) (2)                         3.58 %              3.47 %           3.52 %             3.48 %

(1) The ratio has been annualized and is not necessarily indicative of the results for the entire year.

(2) Net interest margin is presented on a fully taxable equivalent basis, using a 34% federal tax rate.

Interest Income. Interest income for the quarter ended June 30, 2009, decreased $1.1 million, or 13.2%, to $6.9 million from $8.0 million in the same period of 2008. Interest income on loans decreased $934,000, or 15.1%, to $5.2 million for the quarter ended June 30, 2009 due primarily to decreases in the yields earned on our loans as rates declined during 2008 and as a result of decreased outstanding loan balances. Our tax equivalent yields earned on loans declined from 6.57% to 5.83% during the second quarter of 2008 to 2009. Average loans outstanding for the quarter ended June 30, 2009 decreased to $362.4 million from $379.2 million for 2008. Interest income on investment securities decreased $123,000, or 6.7%, to $1.7 million for the second quarter of 2009, as compared to 2008. Average investment securities outstanding increased from $173.6 million for the quarter ended June 30, 2008, to $185.1 million for 2009. Offsetting the increase in average investments outstanding for the comparable period were lower yields earned on the investments, which declined from 4.83% during the second quarter of 2008 to 4.31% during the second quarter of 2009. The increased levels of investments were the result of the increased liquidity primarily from lower outstanding loan balances.

Interest income for the six months ended June 30, 2009, decreased $2.6 million, or 16.0%, to $13.8 million from $16.5 million in the same period of 2008. Interest income on loans decreased $2.4 million, or 18.8%, to $10.4 million for the six months ended June 30, 2009 due primarily to decreases in the yields earned on our loans as rates declined during 2008 and as a result of decreased outstanding loan balances. Our tax equivalent yields earned on loans declined from 6.81% to 5.78% during the first six months of 2008 to 2009. Average loans outstanding for the six months ended June 30, 2009 decreased to $365.4 million from $380.3 million for 2008. Interest income on investment securities decreased $231,000, or 6.3%, to $3.4 million for the first six months of 2009, as compared to 2008. Average investment securities outstanding increased from $170.2 million for the six months ended June 30, 2008, to $183.6 million for 2009. Offsetting the increase in average investments outstanding for the comparable period were lower yields earned on the investments, which declined from 4.95% during the first six months of 2008 to 4.39% during the first six months of 2009. The higher levels of investments was the result of the increased liquidity from lower outstanding loan balances.

Interest Expense. Interest expense during the quarter ended June 30, 2009 decreased $1.1 million, or 32.5%, as compared to the same period of 2008. For the second quarter of 2009 interest expense on interest-bearing deposits decreased $1.1 million, or 40.4% as a result of lower rates on deposit balances, primarily lower rates for our maturing certificates of deposit and lower rates on money market and NOW accounts due to the decline in interest rates experienced during 2008 and the first six months of 2009. Our total cost of deposits declined from 2.64% during the first quarter of 2008 to 1.56% during the same period of 2009. For the second quarter of 2009 interest expense on borrowings decreased $86,000, or 9.6%, due primarily to outstanding balances on our borrowings. Our cost of borrowing increased from 3.51% in the second quarter of 2008 to 3.53% in the same period of 2009.

Interest expense during the six months ended June 30, 2009 decreased $2.7 million, or 35.2%, as compared to the same period of 2008. For the first six months of 2009 interest expense on interest-bearing deposits decreased $2.5 million, or 44.3%, as a result of lower rates on deposit balances, primarily lower rates for our maturing certificates of deposit and lower rates on money market and NOW accounts due to the decline in interest rates experienced during 2008. Our total cost of deposits declined from 2.89% during the first six months of 2008 to 1.61% during the same period of 2009. For the first six months of 2009 interest expense on borrowings decreased $118,000, or 6.5%, due primarily to lower outstanding borrowings and lower rates on our borrowings. Our cost of borrowing declined from 3.61% in the first six months of 2008 to 3.55% in the same period of 2009.

Net Interest Income. Net interest income for the quarter ended June 30, 2009 totaled $4.6 million, increasing $87,000, or 1.9%, as compared to the quarter ended June 30, 2008. Our net interest margin, on a tax equivalent basis, increased from 3.47% during the second quarter of 2008 to 3.58% during the second quarter of 2009.

Net interest income for the six months ended June 30, 2009 totaled $9.0 million, increasing $17,000, or 0.2%, as compared to the six months ended June 30, 2008. Our net interest margin, on a tax equivalent basis, increased from 3.48% for the six months ending June 30, 2008 to 3.52% for the same period in 2009.

See the Rate\Volume Table at the end of Item 2 Management's Discussion and Analysis of Financial Condition for additional details on asset yields, liability rates and net interest margin.

Provision for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance is established based upon management's periodic evaluation of known and inherent risks in the loan portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers' ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan portfolio and the collateral value of specifically identified problem loans. Additionally, allowance strategies and policies are subject to periodic review and revision in response to a number of factors, including current market conditions, actual loss experience and management's expectations.

The provision for loan losses for the quarter ended June 30, 2009 was $800,000, compared to a provision of $300,000 during the same period of 2008. For the six months ended June 30, 2009 our provision for loan losses was $1.1 million as compared to $900,000 for the same period of 2008. The provision remains elevated compared to historical levels prior to 2008, due to the difficult conditions that continue to exist in the economy as well as increased levels of nonperforming loans in our portfolio. The higher provision for loan losses is based upon our analysis of our loan portfolio as well as the effects of the distressed market conditions on the loan portfolio. The increased levels of loan loss provision will likely continue in the current economic environment, particularly given the continued uncertainty regarding the length and severity of the recession we are experiencing. For further discussion of the allowance for loan losses, refer to the "Asset Quality and Distribution" section.

Non-interest Income. Non-interest income increased $875,000, or 49.7%, for the quarter ended June 30, 2009, to $4.5 million, as compared to the six months ended June 30, 2008. The increase was primarily attributable to an increase of $805,000 in gains on sale of loans. The increased gains on sales of loans were driven by higher origination volumes of residential real estate loans that were sold in the secondary market.

Non-interest income increased $961,000, or 26.9%, for the six months ended June 30, 2009, to $4.5 million, as compared to the six months ended June 30, 2008. The increase was primarily attributable to an increase of $1.2 million in gains on sale of loans. The increased gains on sales of loans were driven by higher origination volumes of residential real estate loans that were sold in the secondary market. Partially offsetting the increased gains on sales of loans, was a $246,000 gain that was recognized in the first quarter of 2008 from the prepayment of a FHLB advance, which represented the remaining unamortized fair value adjustment required by purchase accounting.

Investment Securities Gains (Losses). During the second quarter of 2009 we identified a $1.0 million par investment in a pooled trust preferred security as other than temporarily impaired. The same investment was also identified as other than temporarily impaired during the first quarter of 2009, but experienced increased levels of deferrals and defaults during the second quarter of 2009 which exceeded our expectations resulting in an additional net credit-related impairment loss on this security of $249,000 in the second quarter of 2009. During the first six months of 2009 the net credit-related impairment loss totaled $576,000 on the $1.0 million par investment in the pooled trust preferred security identified as other than temporarily impaired. In the second quarter of 2008 we recorded $497,000 of gains on sales of investment securities.

Non-interest Expense. Non-interest expense increased $682,000, or 16.0%, to $4.9 million for the quarter ended June 30, 2009, as compared to the same period of 2008. The increase was primarily driven by increases of $435,000 in FDIC insurance premiums, $106,000 in compensation and benefits, and $71,000 in professional fees. The increase in FDIC insurance premiums was the result of a $277,000 special assessment, which affected all FDIC insured institutions, as well as higher assessment rates and the depletion of our FDIC assessment credits. The increase in compensation and benefits was driven by higher salary costs and the addition of employees resulting from the acquisition of a branch in Lawrence, Kansas. The increases in professional fees are due primarily to the legal costs associated with our branch acquisition.

Non-interest expense increased $848,000, or 9.9%, to $9.4 million for the six months ended June 30, 2009, as compared to the same period of 2008. The increase was primarily driven by increases of $454,000 in FDIC insurance premiums, $154,000 in compensation and benefits, $131,000 in professional fees and $129,000 in foreclosure and other real estate expenses. The increase in FDIC insurance premiums was the result of a $277,000 special assessment, which affected all FDIC insured institutions, as well as higher assessment rates and the depletion of our FDIC assessment credits. The increase in compensation and benefits was driven by higher salary costs and the addition of employees resulting from the acquisition of a branch in Lawrence, Kansas. The increases in professional fees are primarily associated with our branch acquisition. The increase in foreclosure and other real estate expenses, which is included in other non-interest expenses, was the result of increased foreclosure activity and other real estate balances.

Income Tax Expense. Income tax expense decreased $402,000, or 67.8%, from $594,000 for the quarter ended June 30, 2008, to $192,000 for the quarter ended June 30, 2009. The effective tax rate for the second quarter of 2009 was 15.9% compared to 27.4% during the second quarter of 2008. The decline in the effective tax rate was primarily driven by lower taxable income as a percentage of earnings before income taxes, while tax exempt income remained relatively constant between the periods.

Income tax expense decreased $522,000, or 57.1%, from $914,000 for the six months ended June 30, 2008, to $393,000 for the six months ended June 30, 2009. The effective tax rate for the first six months of 2009 was 16.3% compared to 25.7% during the first six months of 2008. The decline in the effective tax rate was primarily driven by lower taxable income as a percentage of earnings before income taxes, while tax exempt income remained relatively constant between the periods.

Asset Quality and Distribution. Our primary investing activities are the origination of commercial, commercial real estate, mortgage and consumer loans and the purchase of investment securities. Total assets increased to $613.1 million at June 30, 2009, compared to $602.2 million at December 31, 2008. Net loans, excluding loans held for sale, decreased to $355.3 million at June 30, 2009 from $365.8 million at December 31, 2008. The reduction in our total loans is primarily the result of reducing our exposure to construction loans in response to the current issues affecting real estate markets in addition to our normal one-to-four family residential loan runoff.

The allowance for losses on loans is established through a provision for losses on loans based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans with respect to which full collectibility may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an adequate allowance for losses on loans. During 2009, in response to our assessment that the economic climate continues to show signs of weakness and the increase in our non-performing assets, we have increased our provision for loan losses. As a result our allowance for loan losses has increased to $4.8 million at June 30, 2009. We feel that higher levels of provisions for loan losses are justified based upon our analysis of our loan portfolio as well as the effects of the depressed market conditions on our loan portfolio. We feel the external risks within the environment which we operate remain present today and will need to be continuously monitored. We have identified the stresses in our loan portfolio and are working to reduce the risks of certain loan exposures, including significantly reducing our exposure to construction and land development loans. Although we believe that we use the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustment to the allowance for loan losses. In addition, net earnings could be significantly affected if circumstances differ substantially from the assumptions used in establishing the allowance for loan losses.

Loans past due more than a month totaled $15.6 million at June 30, 2009, compared to $9.4 million at December 31, 2008. At June 30, 2009, $13.6 million in loans were on non-accrual status, or 3.8% of net loans, compared to a balance of $5.7 million in loans on non-accrual status, or 1.6% of net loans, at December 31, 2008. Non-accrual loans consist primarily of loans greater than ninety days past due and which are also included in the past due loan balances. There were no loans 90 days delinquent and still accruing interest at June 30, 2009 or December 31, 2008. The increase in non-accrual and past due loans was primarily driven by a $4.2 million construction loan relationship and a $3.7 million commercial agriculture loan that were classified as non-accrual and past due during the first six months of 2009. Our impaired loans increased primarily because of the same two loans that impacted non-accrual and past due loan balances. Our analysis of the two nonperforming loans mentioned above concluded that the potential exists that the updated collateral values or sources of repayment may not be sufficient to fully cover the outstanding loan balances. As part of the Company's credit risk management, we continue to aggressively manage the loan portfolio to identify problem loans and have placed additional emphasis on its commercial real estate and construction relationships. During the six months ended June 30, 2009 we had a net loan charge-off of $144,000 compared to $1.7 million of net loan charge-offs for the comparable period of 2008. The net loan charge-off improved as the result of a $200,000 deficiency settlement on previously charged-off construction loans which were foreclosed on during 2009 and lower total charge-offs during the first six months of 2009 as compared to 2008.

Liability Distribution. Our primary ongoing sources of funds are deposits, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and the restructuring of the financial services industry. Total deposits increased $22.1 million to $461.6 million at June 30, 2009, from $439.5 million at December 31, 2008. The increase was related to seasonal fluctuations, increased retail deposits, and the $6.4 million of deposits assumed with our branch purchase. Total borrowings decreased $14.4 million to $90.0 million at June 30, 2009, from $104.4 million at December 31, 2008. The decline was primarily from repaying a $10.0 million FHLB advance and the outstanding borrowings on our FHLB line of credit.

Certificates of deposit at June 30, 2009, which were scheduled to mature in one year or less, totaled $160.4 million. Historically, maturing deposits have generally remained with our bank and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity.

Liquidity. Our most liquid assets are cash and cash equivalents and investment securities available for sale. The levels of these assets are dependent on the operating, financing, lending and investing activities during any given period. These liquid assets totaled $196.8 million at June 30, 2009 and $185.1 million at December 31, 2008. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we increase our liquid assets by investing in short-term U. S. federal agency obligations, high-grade municipal securities or FDIC insured certificates of deposits with other financial institutions.

Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. In the event we require funds beyond our ability to generate them internally, additional funds are generally available through the use of FHLB advances, a line of credit with the FHLB, other borrowings or through sales of securities. At June 30, 2009, we had outstanding FHLB advances of $61.1 million and no borrowings against our line of credit with the FHLB. At June 30, 2009, our total borrowing capacity with the FHLB was $114.8 million. At June 30, 2009, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity was $15.9 million. We also have various other fed funds agreements, both secured and unsecured, with correspondent banks totaling approximately $67.7 million at June 30, 2009, which had no borrowings against at that time. We had other borrowings of $28.8 million at June 30, 2009, which included $16.5 million of subordinated debentures and $6.9 million in repurchase agreements. Additionally, we have a $9.0 million line of credit from an unrelated financial institution maturing on November 19, 2009 with an interest rate that adjusts daily based on the prime rate less 0.25%. This line of credit has covenants specific to capital and other ratios, which the Company was in compliance with at June 30, 2009. The outstanding balance on the line of credit at June 30, 2009 was $5.4 million, which was also included in other borrowings.

As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters . . .